Tuesday, February 27, 2007

Iraq is lost for the US and its allies, but the challenge is how to disentangle themselves with a degree of "honour" from the fiasco they have created. The US President, George Bush, and two of his close supporters, prime ministers Tony Blair and John Howard, have warned that a withdrawal before the "task is completed" - whatever that might mean - will result in a "victory for terrorism", with disastrous consequences for Iraq, the region and the world.

But to the contrary, a withdrawal might prove to be the best way to stabilise Iraq and shrink the menace of terrorism.

The US can no longer hope to "win" the Iraq conflict, or democratise the country and the region as it had once envisioned. Such a vision is disconnected from reality: Iraq is now deep in a sectarian civil war and a proxy conflict between Iran and many Arab states.

Neither a majority of the Iraqis, nor the regional states, view the US as capable of shaping their future. They see the continued military operations by the US and its allies as part of a desperate effort to "Iraqise" the war as an exit strategy. This was a strategy the US used to exit from Vietnam and the Soviet Union deployed to withdraw from Afghanistan. However, they also know the strategy did not work in Vietnam and Afghanistan, and is equally doomed in Iraq.

If the US decides to pull out of Iraq, a regional solution to the Iraq problem is likely to emerge.

The US and its allies are not the only actors in Iraq. Others with high stakes are its neighbours, especially Iran, Syria, Turkey and the Gulf Co-operation Council countries, led by Saudi Arabia. These all have cross-border sectarian and ethnic ties with various segments of Iraqi society, and will have every reason, once the coalition forces are leaving, to do their best to stabilise Iraq rapidly.

Although the US has touted Iran and Syria as dangerous predators, these two actors, more than any others, will probably want to see the end of the Iraq conflict sooner rather than later.

Iran and Syria, which are regional strategic partners, have strong leverage with some of the powerful elements among Iraq's Shia majority and the Sunni-dominated resistance respectively. They will feel it imperative to use all their influence to move these elements down the path of reconciliation and power sharing as quickly as manageable.

Meanwhile, they are fully aware of the complexity of Iraq in terms of a majority of its population being of Arab origin and Iraq's national identity historically being forged as an Arab state, but with a substantial non-Arab Sunni Kurdish minority.

To stabilise Iraq, they will have to bring Turkey and Saudi Arabia and possibly several other members of the Arab League on board by meeting their concerns. Turkey would want Iraq's Kurdish minority not to have anything more than limited autonomy and the Arab neighbours would be keen to see Iraq's identity as an Arab state preserved. Tehran and Damascus will have no difficulty in meeting the Turkish demand. Like Turkey, Iran has it own Kurdish minority, and remains opposed to any development in Iraq that could possibly become a source of encouragement for its own Kurds.

As for the Arab identity of Iraq, this is a compromise that Iran will ultimately have to make to avoid becoming entangled in a costly drawn-out conflict in Iraq, and at the same time preserve its strategic partnership with Syria, influence through Hezbollah in Lebanon and good relations with the rest of the Arab world.

The biggest casualty of all these developments is most likely to be al-Qaeda in Iraq. It is a force that is tolerated by various Iraqi groups and Iran because of its anti-American operations. However, once the occupation is ended, it will be of no use to the other actors, as they view it as a threat to them. The likely outcome would be that al-Qaeda will simply be squeezed out of Iraq and substantially weakened in the region.

This could also have a positive spin-off for Afghanistan, where al-Qaeda and its Taliban supporters have rebuilt their strength.

The question is: can the Bush Administration swallow its pride and give grounds to regional actors to achieve what the US and its allies are no longer in a position to do?

Amin Saikal is a professor of political science and the director of the Centre for Arab and Islamic Studies (the Middle East and Central Asia) at the Australian National University.

A group of Irish Roman Catholic bishops on Tuesday called into question Ireland's commercial ties with Israel, saying Israel has made the Gaza Strip "little more than a large prison" for Palestinians.

"Where there is evidence of systematic abuse of human rights on a large scale, as in the Occupied Territories, there are questions that must be asked concerning the appropriateness of maintaining close business, cultural and commercial links with Israel," said auxiliary Bishop of Dublin Raymond Field.

There is a long history of support for Palestinians in Ireland, particularly among nationalist parties such as Sinn Fein, which equate their own fight to end British rule in Ireland with the desire by Palestinians for their own state.

Field, chairman of the Irish Commission for Justice and Social Affairs (ICJSA), which advises Ireland's top Catholic clerics on social issues, described travel restrictions on Palestinians in the West Bank and Gaza as an "injustice."

"We are calling for an end to restrictions on family reunification, and an end to humiliating treatment of people at checkpoints," Field said in an ICJSA statement ahead of a meeting with Irish Foreign Minister Dermot Ahern.

Field said restrictions, which Israel says protect it against Palestinian attacks, also make it difficult for Christians to worship at Bethlehem's Church of the Nativity and the Church of the Holy Sepulchre in Jerusalem.

"In effect, the communities of Bethlehem and East Jerusalem are forced to live divided by a 25 foot wall," said Field.

"We also intend to raise with Minister Ahern the intolerable situation that is the daily lot of the Palestinians who live in Gaza," Field said.

The ICJSA's statement also questioned the way in which the European Union handled its dealings with Israel.

"While we welcome cooperation between the EU and its neighbouring countries, nevertheless such cooperation should not be at the expense of a large segment of the indigenous population - in this case the Palestinians."

A new level of complacency has set in. It’s not just a financial-market thing -- extremely tight spreads on risky assets and sharply reduced volatility in major equity and bond markets. It’s also an outgrowth of the increasingly cavalier attitude of policy makers. That’s true not only of central banks but also -- and this is a major concern of mine -- by the global authorities charged with managing the world financial architecture. Meanwhile, by flirting with the perils of protectionism, politicians are ignoring some of the most painfully important lessons from history. After four fat years, convictions are deep that nothing can derail a Teflon-like global economy. That’s the time to worry the most.

I am especially concerned about a new lax attitude that has crept into the mindset of the so-called stewards of globalization -- namely, the IMF and the broad collection of G-7 finance ministers. Last spring, in an uncharacteristically bullish lapse, I became more optimistic on the global economy than I had been in a long time (see my 1 May 2006 essay, “World on the Mend”). I was especially encouraged that the Wise Men had finally woken up to the perils of ever-mounting global imbalances -- namely, the widening disparity between America’s gaping current account deficit and large and growing surpluses in China, Japan, Germany, and the major oil producers. With great fanfare at the April 2006 G-7 and IMF meetings, institutional support was thrown behind a new framework of multilateral surveillance and consultation -- in my view, materially raising the odds of an orderly, or benign, rebalancing of an unbalanced world.

Unfortunately, the multilateral approach is now rapidly losing momentum. The first joint consultations between the US, Europe, Japan, China, and Saudi Arabia were held last summer, and there was a noticeable lack of “deliverables” following this effort. IMF Managing Director Rodrigo de Rato’s mid-November 2006 report on the “work program” of the Fund’s executive board was a further disappointment, relegating the problems of global imbalances to just one paragraph of a 49-paragraph document. And in the past few months, many of the individual participants at the various G-7 finance ministries and central banks have admitted privately to a lack of progress and conviction in the multilateral approach. With the global economy and world financial markets turning in yet another good year, suddenly, the urgency to act is now seen as less critical by the stewards of globalization. Complacency has claimed an important victim -- thereby undermining the major rationale for my bullish change of heart on the global prognosis.

Meanwhile, central banks -- basking in the warm glow of success on the inflation-targeting front -- are pouring more and more fuel on the global risk binge. America’s Federal Reserve seems to settling for a long winter’s nap -- likely to keep monetary policy on hold through at least the end of this year, according to our US team. While the Fed has expressed repeated concerns about last year’s minor upside breakout of inflation, it has also been quick to stress the coming deceleration on the price front. We could well be in the midst of a period like that which prevailed in the early 1990s, when the US central bank left the federal funds rate unchanged at 3% for a 17-month stretch from September 1992 to February 1994. Unfortunately, that experiment did not end well for the financial markets, as one of the Fed first “normalization campaigns” led to the worst year in modern bond market history.

An inflation-targeting Bank of Japan seems to be of a similar mindset. That’s mainly because of the distinct possibility of a minor deflationary relapse, with year-over-year comparisons in the CPI likely to move from being fractionally positive (+0.1% in January) to slightly negative by March. Moreover, with the economy still judged to be on shaky foundations -- especially the ever-cautious Japanese consumer -- political pressure on the BOJ to refrain from any policy action has been intense. After having succumbed to that pressure in January, Governor Toshihiko Fukui appears to have expended great political capital in orchestrating the BOJ’s second baby step away from its anti-deflationary ZIRP campaign. In the end, a one-party Japan has little tolerance for central bank independence -- especially in light of a still very fragile state of affairs on the inflation front. I suspect, as does our Japan team, that the mid-February policy adjustment will be the last move of the BOJ for a long time.

That leaves the European Central Bank as the only one of the three major central banks that is likely to make any type of a policy adjustment in 2007. Elga Bartsch, our resident ECB watcher, puts the upside at 50 basis points of rate hikes. This suggests that European monetary authorities -- the most dogmatic of the inflation targeters in central banking circles -- believe they are now only two policy moves away from their own normalization objectives in a still low-inflation world. This view, of course, is predicated on the belief that the European economy continues to surprise on the upside. Should that view be drawn into question for any reason -- hardly a trivial possibility in light of the recent increase in the German VAT tax, the lagged impacts of euro appreciation, and the ripple effects of Italian fiscal consolidation -- the risks to the ECB policy path could quickly tip to the downside.

There’s nothing wrong with this picture from a strict inflation-targeting perspective. But that’s just the point, in my view. At low levels of inflation -- and persistent risks of deflation in Japan -- inflation targeting produces an exceptionally low level of nominal interest rates. That, in turn, continues to fuel the great liquidity binge that underpins an extraordinary degree of risk taking still evident in world financial markets. Central banks have circled the wagons in taking an agnostic position on this state of affairs. As a former senior central banker put it to me indignantly the other day, “Who are we to judge the state of markets?” That’s indicative of what I believe is a very narrow perspective of the role and purpose of central banking. Most importantly, it relegates financial stability to a secondary consideration at precisely the time when financial globalization and innovation could be inherently destabilizing.

The orthodox view of modern-day central banking is premised on the belief that hitting the narrow target of CPI-based price stability is sufficient to address anything else that might come along. Never mind that this approach has produced a most unfortunate string of asset bubbles -- first equities, now property, and next those that may well be bubbling up to the surface in the form of a tightly correlated compression of spreads on a host of risky assets (i.e., emerging market debt and high-yield corporate credit). Never mind the explosion of worldwide derivatives, whose notional value has now reached some $440 trillion (OTC and listed, combined) -- over nine times the size of the global economy. Central bankers will tell you that the liquidity and risk-distribution benefits of derivatives far outweigh the lack of transparency and limited information they have on the incidence and concentration of counter-party risk. Never mind the power of the carry trade, which has been given a new lease on life by the politically-compromised Bank of Japan. Never mind the potential “canary in the coal mine” that may well be evident in America’s sub-prime mortgage market. All in all, increasingly complacent central banks are telling us that these concerns are not actionable issues for monetary policy. That could well be a blunder of tragic proportions.

A similar complacency is evident on the political front. As the pendulum of economic power in the developed world has swung from labor to capital, the pendulum of political power is now swinging from the right to the left -- not just in the US but also in France, Germany, Italy, Spain, Japan, and Australia (see my 8 January 2007 dispatch, “Power Shift”). As pro-labor politicians now move into action, trade protectionism is increasingly getting the nod as a legitimate policy response. Nowhere is this more evident than in Washington D.C. I have spent a good deal of time in the US capitol the past couple of weeks and sense that Congress’s anti-China sentiment is most assuredly intensifying. The new Democratically-controlled Congress is not in a rush -- its momentum on trade policy, in general, and China, in particular, is methodical yet increasingly contentious. I have taken the other side in the debate at several forums in Washington -- but to little or no avail. This takes complacency to an even more worrisome level. US politicians feel completely justified in ignoring some of the most painful lessons of history. And, ironically, the broad consensus of investors feels equally justified in ignoring the possibility of a protectionist outcome. Such an inconsistency is yet another example of a world in denial.

I’ve been relatively constructive on the global outlook over the past 10 months. The call didn’t work out all that badly -- the world economy turned in another great year and, after a brief bout of risk-aversion last May, the markets did fine as well. That was then. New and worrisome political forces are coming into play at precisely the time when the stewards of globalization have gone back into hibernation. Meanwhile, central banks are refusing to take away the proverbial punchbowl when the party is getting better and better -- instead, egging on the risk-takers when risky assets are priced for all but the absence of risk.

Enough is enough -- from where I sit, it no longer makes sense to maintain an optimistic prognosis of the world. This is more of a structural call than a cyclical view. I remain agnostic on the near-term outlook, and certainly concede that the Goldilocks-type mindset currently prevailing could put more froth into the markets. But complacency is building to dangerous levels — always one of the greatest pitfalls for financial markets. And yet that’s precisely the risk today, as investors, policymakers, and politicians all seem to have dropped their guard at the same point in time. The odds have shifted back toward a more bearish endgame. I have a gnawing feeling we’ll look back on the current period with great regret.

Subprime mortgage lenders provide higher-priced loans to consumers with impaired credit. Defaults and delinquencies among subprime borrowers have jumped since late 2006, and a number of lenders have shut down or scaled back their operations.

On Wednesday, for example, shares of subprime lender NovaStar Financial plummeted more than 42% to $10.10 after it announced a fourth-quarter loss of $14.4 million. CEO Scott Hartman said in a conference call Tuesday that the company expects to recognize little, if any, taxable income through 2011.

While the NABE finding illustrates concern about escalating problems in the subprime sector, it doesn't mean economists expect the difficulties to spark broader financial stress. Overall, they expect steady economic growth in 2007.

"The outlook for consumer spending, which is the one that might be hit the highest by mortgage delinquencies and defaults, was actually revised upward," says Carl Tannenbaum, NABE president and an economist at LaSalle Bank.

The economists predict that the U.S. economy will expand at a 2.5% to 2.6% annual rate in the first half before accelerating to around 3% later this year. Growth is expected to average 2.8% for the year, in line with earlier NABE reports.

Housing will continue to be the biggest drag on growth. After five years of a boom market, housing starts have plunged in the past year.

The jobless rate, now 4.6%, is expected to inch up to 4.7%, the NABE says. Corporate profits, which rose by an estimated 19% last year after taxes, are projected to rise by a far more modest 5% in 2007.

If it hopes to tame Iran, the United States must rethink its strategy from the ground up. The Islamic Republic is not going away anytime soon, and its growing regional influence cannot be limited. Washington must eschew superficially appealing military options, the prospect of conditional talks, and its policy of containing Iran in favor of a new policy of détente. In particular, it should offer pragmatists in Tehran a chance to resume diplomatic and economic relations. Thus armed with the prospect of a new relationship with the United States, the pragmatists would be in a position to sideline the radicals in Tehran and try to tip the balance of power in their own favor.---

Over five years after the Bush administration vowed to transform the Middle East, the region is indeed profoundly different. Washington's misadventures in Iraq, the humbling of Israeli power in Lebanon, the rise of the once-marginalized Shiites, and the ascendance of Islamist parties have pushed the Middle East to the brink of chaos.

In the midst of the mess stands the Islamic Republic of Iran. Its regime has not only survived the U.S. onslaught but also managed to enhance Iran's influence in the region. Iran now lies at the center of the Middle East's major problems -- from the civil wars unfolding in Iraq and Lebanon to the security challenge of the Persian Gulf -- and it is hard to imagine any of them being resolved without Tehran's cooperation. Meanwhile, Tehran's power is being steadily enhanced by its nuclear program, which progresses unhindered despite regular protests from the international community.

This last development has put Washington in a bind. Ever since the revolution that toppled the shah in 1979, the United States has pursued a series of incoherent policies toward Tehran. At various points, it has tried to topple the regime -- even, on occasion, threatening military action. At others, it has sought to hold talks on a limited set of issues. Throughout, it has worked to box in Iran and to limit its influence in the region. But none of these approaches has worked, especially not containment, which is still the strategy of choice in the Iran policy debate.

If it hopes to tame Iran, the United States must rethink its strategy from the ground up. The Islamic Republic is not going away anytime soon, and its growing regional influence cannot be limited. Washington must eschew superficially appealing military options, the prospect of conditional talks, and its policy of containing Iran in favor of a new policy of détente. In particular, it should offer pragmatists in Tehran a chance to resume diplomatic and economic relations. Thus armed with the prospect of a new relationship with the United States, the pragmatists would be in a position to sideline the radicals in Tehran and try to tip the balance of power in their own favor. The sooner Washington recognizes these truths and finally normalizes relations with its most enduring Middle Eastern foe, the better.

NO GOOD OPTIONS

When discussing Iran, President George W. Bush commonly insists that "all options are on the table" -- a not-so-subtle reminder that Washington might use force against Tehran if all else fails. This threat overlooks the fact that the United States has no realistic military option against Iran. To protect its nuclear facilities from possible U.S. strikes, Iran has dispersed them throughout the country and placed them deep underground. Any U.S. attack would thus have to overcome both intelligence-related challenges (how to find the sites) and thorny logistical ones (how to hit them). (As the Iraq debacle has shown, U.S. intelligence is not always as reliable as it should be.) And even a successful military attack would not end the mullahs' nuclear ambitions; it would only motivate them to rebuild the destroyed facilities, and to do so with even less regard for Iran's treaty obligations.

What about holding a conditional dialogue, like the one proposed by Secretary of State Condoleezza Rice? In May 2006, Rice seemed to take a major step forward when she announced that the United States would be willing to participate in multilateral talks with Iran over the nuclear question if Iran suspended its uranium-enrichment activities. But the statement miscast the dispute between the United States and Iran as a simple problem of disarmament. In fact, the political and strategic differences between the two countries run much deeper -- and require a far more comprehensive approach.

Given these unpalatable realities, many U.S. policymakers have begun to gravitate toward what they see as the least objectionable option: containment. Their hope is that the systematic application of diplomatic pressure and economic sanctions will counter Tehran's nefarious designs in the short term and eventually usher in a new Iranian government more democratic and more amenable to U.S. interests.

The idea of containing Iran is not new; in one form or another, it has been the de facto policy of the United States since the inception of the Islamic Republic, and it has enjoyed broad bipartisan support in Washington. Yet to endorse it in good conscience today, one must answer important questions: Can a state that projects its influence through indirect means, such as supporting terrorism, financing proxies, and associating with foreign Shiite parties, truly be contained? Will other states in the region be willing to help the United States isolate Iran?

Were Washington to rationally consider its alternatives, it would quickly realize that the answer to these questions is no. But U.S. policy has long been dominated by a visceral suspicion of Tehran. During the heady days that followed the 1979 revolution, Iran's Islamist rage appeared awesome and dangerously expansive. The ruling clerical elite viewed Iran's borders as relics of a discredited past and seemed committed to exporting the revolution. The regional order, however, proved more durable than the mullahs had expected, and most of Iran's revolutionary dreams perished on the battlefields of Iraq in the 1980s. The costly war with Baghdad forced the clerical elite to realize the limits of its power and the impracticality of its ambitions. Tehran persisted with its universalist rhetoric, but its foreign policy became quite pragmatic. Still, a perception of Iran as a destabilizing force congealed in the U.S. imagination and has endured ever since, even though Iran stopped being a revisionist state long ago and has now become a medium-sized power seeking regional preeminence. Containment, in other words, ceased to be appropriate a while back because Iran stopped being a revolutionary state bent on forcibly exporting its model of government.

In fact, containment never worked -- and it has even less of a chance of working in the future. Its failures have been well documented in yearly reports by the State Department, which detail Iran's ongoing support for terrorism and warn of advances in its nuclear program. Sanctions and other forms of U.S. pressure have failed to prevent Iranian misbehavior. Worse, the Bush administration has taken steps recently that make containment an even less effective policy. Washington's ill-advised invasion of Iraq has benefited Iran by empowering local Shiite parties sympathetic to Tehran. Long gone are the days when a powerful, Sunni-dominated Iraq could function as a counterweight to Shiite power in Iran. Iraq's Shiites are hardly homogeneous, but the leading Shiite parties in power in Baghdad -- Dawa and the Supreme Council for the Islamic Revolution in Iraq -- have intimate ties to Tehran. This does not mean that Iraq's new leaders are willing to subordinate their interests to those of Iran, but they are unlikely to confront the Islamic Republic at the behest of Washington.

Nor is any other country in the Middle East likely to stand up to Iran today. A long tradition of purchasing security from the British Empire and then from the United States historically offered the Arab sheikdoms of the Persian Gulf a degree of independence vis-á-vis their powerful Persian neighbor. But the Bush administration's impetuous behavior and its inability to pacify Iraq have shattered local confidence in U.S. capabilities. Widespread anti-Americanism has made it harder for governments in the region to cooperate with Washington or to allow U.S. forces on their soil. The United States may be able to keep offshore naval forces and modest bases in reliable states such as Kuwait, but it is unlikely to have a significant presence in the region, as it is too unpopular with the masses and seems too erratic to the elites. Many Persian Gulf states now have more confidence in Iran's motivations than in the United States' destabilizing designs. And so as Iran's power increases, the local sheikdoms are likely to opt for accommodating Tehran rather than confronting it.

The international community has also seemed relatively indifferent to Iran's actions. Over the past year, the Bush administration has scored a number of procedural points against Tehran: for example, at Washington's insistence, the UN Security Council has censured Iran and urged suspension of its nuclear program. Despite such symbolic successes, however, few great powers now support the imposition of strenuous sanctions on the Islamic Republic. This is not because the French are pusillanimous or the Russians are unprincipled but because Washington's allies do not agree that Iran poses a major and urgent threat. For them, Iran's nuclear ambitions and even its penchant for terrorism are disturbing but manageable challenges that can be addressed without resorting to military force or coercive economic measures. During the early days of the Cold War, the United States was able to garner support for containing the Soviet Union because most of its European partners were as concerned about the Soviets as it was. Not so with Iran today; with the exception of Israel, few of the United States' friends seem very worried.

AN AFFAIR TO REMEMBER

In order to develop a smarter Iran policy, U.S. leaders must first accept certain distasteful facts -- such as Iran's ascendance as a regional power and the endurance of its regime -- and then ask how these can be accommodated. Despite its incendiary rhetoric and flamboyant claims, the Islamic Republic is not Nazi Germany. It is an opportunistic power seeking to assert predominance in its immediate neighborhood without recourse to war. Acknowledging that Iran is a rising power, the United States should open talks with a view to creating a framework to regulate Iran's influence, displaying a willingness to coexist with Iran while limiting its excesses. In other words, Washington should embrace a policy of détente.

As far-fetched as this call may seem, the United States does have experience dealing with seemingly intractable powers. In the late 1960s, as the U.S. presence in Asia was waning, China began to flex its muscles in its neighborhood. President Richard Nixon and Henry Kissinger, his national security adviser, did not respond by denying the reality of Chinese power. They started talking to Beijing, soon winning China's assistance in ending the Vietnam War and in stabilizing East Asia. Similarly, the Nixon administration's détente policy toward the Soviet Union succeeded not only in averting conflict with Moscow but also in gaining its cooperation on critical arms control issues.

It is not entirely clear whether Iran would be as willing a negotiating partner today as China and the Soviet Union once were. But there is reason to hope so. Recent developments in the Middle East and Iran's own internal convulsions have placed Tehran at a critical juncture: Iran's emergence as the most powerful state in the Persian Gulf means that Tehran might finally alter its relationship with its great nemesis; it must move toward either coexistence or confrontation with the United States.

Throughout previous attempts at negotiations with Washington, the Iranian government had favored comprehensive talks over discussions of a single issue. In its latest response to the joint offer by the United States and the European Union last summer, Tehran stressed its readiness for "long-term cooperation in security, economic and political and energy areas in order to achieve sustainable security in the region and long-term energy security." It also argued that "to resolve the issue at hand in a sustainable manner, there would be no alternative except to recognize and remove the underlying roots and causes that have led the two sides to the current complicated position."

Getting past this "complicated position" may require Washington to pay closer attention to recent changes in Tehran. Iran's need for a foreign policy better adapted to changes in the Middle East, the regime's perennial factionalism, and, perhaps most significant, the rise of a new generation of leaders in Tehran have sparked important internal debates within the regime. If the United States plays its cards right, it could become an important arbiter in those deliberations.

Westerners tend to see Iran's domestic politics as a contest between hard-liners and pragmatists. Jockeying by the former president, Hashemi Rafsanjani, and the supreme leader, Ali Khamenei, along with the periodic ebbs and flows of the reform movement, have long preoccupied foreigners hoping to nudge Iranian politics toward democratization. But these observers have failed to realize that the old model of liberals versus conservatives no longer holds. The Iranian regime is in the process of transforming itself, under the influence of a rising group of young conservatives. The elders of the revolution still retain ultimate authority, but they are increasingly reacting to initiatives launched by their more assertive disciples. There no longer is a main fault line running between the left and the right; today, fissures in Tehran run between the old and the young -- and among the young of the new right.

Unlike their predecessors during 1980s, these new leaders -- even the provocative Iranian president, Mahmoud Ahmadinejad -- have refrained from denouncing and plotting the overthrow of the monarchies of the Persian Gulf and the pro-Western regimes in Egypt and Jordan; they are more concerned with these states' external relations than with their internal composition. They have also refrained from exporting the Iranian Revolution to the fertile grounds of Iraq. Anticipating opposition to such attempts from senior Iraqi Shiite clerics and politicians, Iranian officials have preferred to focus on more practical concerns. Although they want a sympathetic and accommodating neighbor, they have no illusions that Iraqi Shiites would yield to Tehran's mandates. They continue to support Shiite parties in Iraq not because they wish to install an Iranian puppet or proxy there but because they hope to prevent the rise of another hostile Sunni-dominated regime.

This is not to suggest that the new right is not seeking meaningful changes in Iran's international relations. But the debates gripping Tehran today focus on how the regime can consolidate its sphere of influence and best exploit its status as an emerging regional hegemon. The displacement of the Taliban in Afghanistan and of Saddam Hussein, as well as the United States' entanglement in Iraq, have led callow reactionaries in Iran to perceive unique opportunities for their country's ascendance. Iran now sees itself as the indispensable nation in the Middle East.

DIVIDED WE STAND

As is customary for any leading faction in Iranian politics, however, the new right is itself fractured. And one of the matters that divide it is whether Iran's interests are best served by coexisting with the United States or by defying it. On one end of the spectrum are the radicals, whose most prominent exponent is President Ahmadinejad but who also include individuals in other critical posts, such as Morteza Rezai, the deputy commander of the Revolutionary Guards, and Mojtaba Hashemi Samareh, the deputy minister of the interior. Drawing their strength from the Revolutionary Guards (particularly its intelligence apparatus), the Basij paramilitary force, and groups such as the Alliance of the Developers of Islamic Iran and the Islamic Association of Engineers, the radicals cannot be easily ignored. Although many senior members of the clergy dismiss Ahmadinejad's religious pretensions, he has won the support of a narrow segment of the clerical class, especially the archreactionary Ayatollah Muhammad Taqi Mesbah-Yazdi, a spiritual guide to many young reactionaries.

The formative political experience of many of these radicals was not the 1979 revolution but the war against Iraq in the 1980s, which left them disdainful of the United States and the international community and obsessed with self-reliance. According to these veterans, the war showed that Iran's interests cannot be safeguarded by adhering to international treaties or appealing to Western opinion. In particular, Ahmadinejad and his allies see the United States as "the Great Satan," a source of cultural contamination and a rapacious capitalist power that exploits indigenous resources. In their view, the United States has caused all of Iran's misfortunes, from the shah's regime to the country's invasion by Iraq under Saddam. But they also see the United States as a declining power. General Hussein Salami, a commander of the Revolutionary Guards, said in March 2006, "We have assessed the ultimate power of global arrogance, and on this basis there is nothing to worry about."

Despite his deep religious convictions, Ahmadinejad is not a messianist seeking to usher in a new world order; he is a canny manipulator trying to rouse public indignation in a chaotic neighborhood. He understands that the carnage in Iraq, the stalled Israeli-Palestinian peace process, and the inability of Arab rulers to stand up to Washington have created intense anti-Americanism throughout the Middle East and that there is growing popular hunger for a leader willing to stand up to Israel and the United States. And he very much wants to be that leader. To that end, he has used incendiary rhetoric about the Holocaust and Israel, support for Hezbollah, and appeals to Muslim solidarity to overcome sectarian divides, turning his Shiite Persian country into an object of admiration even for Sunni Arabs.

Understandably, too, Ahmadinejad and his allies view the acquisition of nuclear weapons as critical to consolidating Iran's position and helping the country eclipse U.S. influence in the region -- a prize worth suffering pain and sanctions to achieve. Ayatollah Mesbah-Yazdi has declared that task a "great divine test," and the newspaper Kayhan, a mouthpiece of the extreme right, has argued that the "knowledge and ability to make nuclear weapons" are "necessary in preparation for the next phase" on "the future battlefield." Given their distrust of Washington, the hard-liners assume that the United States' objections to their nuclear ambitions have less to do with countering proliferation than with exploiting the issue to enlist the support of U.S. allies against Iran. As Ahmadinejad has put it, "If this problem is resolved, then [the Americans] will bring up the issue of human rights. If the human rights issue is resolved, then they will probably bring up the issue of animal rights."

Ahmadinejad's antics have succeeded in turning him into an object of international attention over the last two years, making it easy for outside observers to overlook the emergence of another important camp within Iran's new right. This group, while also conservative, tends to stress Iranian nationalism over Islamic identity and pragmatism over ideology. Among the leaders of the group are Ali Larijani, the head of the Supreme National Security Council; Abbas Mohtaj, the commander of Iran's navy; and Ezzatollah Zarghami, the head of the Islamic Republic of Iran Broadcasting -- all nationalists who, like the radicals, were shaped by the Iran-Iraq War but who drew different conclusions from it. During the 1990s, as reformers took over many of Iran's state institutions, these conservatives retreated into research centers, particularly Imam Hussein University, to reassess Iran's international relations. Judging by their writings and speeches, they seem to have concluded both that the end of the Cold War and Iran's unique geographic location made it a natural regional power and that Iran's progress had been thwarted by the regime's ideological excesses and its unnecessarily hostile approach to the West. The only way for Iran to realize its potential, they argued, was for it to behave more judiciously, and that meant limiting some expressions of its influence, acceding to certain international norms, and negotiating mutually acceptable compacts with its adversaries. In the last two years, many members of this pragmatic faction have risen to influence within the Supreme National Security Council, the intelligence community, and the military. Using their links to traditional clerical networks and their intimate ties to the supreme leader, they are trying to wrest control of Iran's international relations from the militants. The real significance of Iran's municipal elections in December 2006, in which Ahmadinejad's camp scored disappointing results, lay not so much in the revival of the reform movement as in the fact that many younger conservatives who are uneasy about Ahmadinejad's policies did well.

Nothing divides the two groups of the new right more than their attitude toward the United States. The pragmatists argue that Iran's predominance cannot be guaranteed without a more rational relationship with Washington. In an interview in late 2005, Larijani said, "We may be sure that the Americans are our enemies," but "working with the enemy is part of the work of politics." He added, "The strategy of curbing and reducing disruptions and normalizing relations is itself beneficial in the long term." Like the hawks, Larijani and his allies argue that the U.S. presence in the Middle East is bound to diminish, but, unlike the hawks, they worry that it could continue to block Tehran's resurgence. In their view, smoothing relations with the United States would pave the way for Iran to increase its influence in the region.

The moderates agree with the radicals that to enhance its influence Iran needs a nuclear weapons capability. As the deputy head of the Supreme National Security Council, Ali Hosseinitash, has noted, "The nuclear program is an opportunity for us to make endeavors to acquire a strategic position and consolidate our national identity." But the moderates also believe in restraint. They advocate continued adherence to Iran's obligations under the Nuclear Nonproliferation Treaty (NPT) and stress the importance of offering confidence-building measures to the international community. They hope that by improving Tehran's relationship with Washington they can assuage U.S. concerns about Iran's nuclear development without having to abandon the program.

Hovering over this debate is the indecisive supreme leader, who so far has tentatively supported the pragmatists' drive for negotiations with the United States. On the one hand, Khamenei, a stern ideologue suspicious of the United States, seems to endorse Ahmadinejad's fiery denunciations of the West and his assertive Islamism. Khamenei has deficient religious credentials -- his lack of erudition places him at a disadvantage in the hierarchical clerical estate -- and that weakness has forced him to rely on reactionary elements to bolster his power; it would be difficult for him to rein in the determined Ahmadinejad. On the other hand, Khamenei's relationship with the hard-liners has always been uneasy, as they have doubted his resolution during times of crisis. In order to survive the treacherous politics of the Islamic Republic, Khamenei has balanced different factions without unduly empowering any one of them.

So far, the pragmatists have managed to nudge Khamenei toward accepting potential negotiations with the United States over issues of mutual concern. But Iran's political landscape is changing rapidly. The United States' declining fortunes in Iraq, Hezbollah's touted victory against Israel last summer, and the success of Ahmadinejad's defiant nuclear diplomacy seem to prove right those who call for confrontation. The supreme leader, who is generally prone to indecision, now seems disinclined to settle the internal debates in Tehran in a conclusive manner.

THE UNITED WAY

The most effective way for Washington to resolve this uncertainty in its favor would be to practice more imaginative diplomacy. That would require more than a policy shift; it would require a paradigm shift. Guided by the notion of containment, U.S. policymakers have long seen the normalization of relations as the end result of a long process of negotiations. But with a new policy of engagement, normalization would have to be the starting point of talks; it would then facilitate discussions on issues such as nuclear weapons and terrorism. A strategy that seeks to create a web of mutually reinforcing security and economic arrangements has the best chance of tying Iran to the status quo in the region. In essence, a new situation would be created in which Tehran's relationship with Washington would be more valuable to the regime than either its ties to Hezbollah or its pursuit of nuclear arms.

To provoke such a change, Washington must strengthen the hands of the pragmatists in Tehran by offering Iran relief from sanctions and diplomatic relations. Washington's recognition of Iran's regional status and deepened economic ties with the West might finally enable the pragmatists to push Khamenei to marginalize the radicals who insist that only confrontation with the United States can allow Iran to achieve its national objectives.

As the United States reconsiders its Iran policy, it should dispense with the notion of offering Tehran security guarantees. It is conventional, even routine, in Washington policy circles to suggest that the Iran conundrum can be resolved only if the Bush administration pledges not to attack Iran. This argument reflects a fundamental misunderstanding of how the Islamic Republic perceives its power and its place in the Middle East today. The guardians of the theocratic regime do not fear the United States; they do not relate to the international community from a position of strategic vulnerability. Tehran now seeks not assurances against U.S. military strikes but an acknowledgment of its status and influence.

The United States does need to make important changes to its approach to Iran, however, in terms of both substance and style. Given the theocratic nature of the Iranian regime and its paranoia, Washington will have to adapt its rhetoric. U.S. officials can no longer denounce Iran as an "outpost of tyranny" or the "central banker of terrorism" in one breath and propose negotiations in the next. Like all regimes born of revolution, Tehran insists that the international community not just recognize its interests but also legitimize its power. Iran's theocrats are in no way unique; remember that for decades the Soviets demanded that the United States officially acknowledge postwar demarcations of Eastern Europe. A new U.S. policy toward Iran will have to officially recognize the authority of the Islamic Republic.

In this spirit, Washington must abandon its hopeless policy of regime change, including its paltry award of $75 million to Iranian exiles and for broadcasts into Iran. For one thing, such idealism is misplaced. Unlike Eastern Europe in the 1980s, Iran simply does not have a cohesive opposition movement willing to take direction and funding from the United States. For another, calls for regime change are counterproductive. Washington's fulminations and its provision of aid to the (nonexistent) democratic opposition have convinced many Iranian hard-liners that Washington's offer to negotiate is an attempt to undermine the regime in Tehran. Thus, any effort by moderates to engage with the United States is routinely denounced as a concession to the Great Satan's subversive ploys. Iran will certainly change, but on its own terms and at its own pace. The United States has an interest in promoting a more tolerant government in Tehran, but it will not help itself by broadcasting tall tales from Iranian exiles or with Bush's appeals to an indifferent Iranian populace. Integrating Iran into the world economy and global society would do far more to accelerate its democratic transformation.

RULES OF ENGAGEMENT

The best way toward an effective, engaged relationship with Iran is for Washington to open direct negotiations on issues of critical importance, along four separate tracks. Since the purpose of the talks would be to normalize relations, the first track should deal with setting a timetable for resuming a diplomatic relationship, gradually phasing out U.S. sanctions, and returning Iran's frozen assets. Holding out meaningful incentives such as these would go a long way toward facilitating productive discussions on more difficult issues and would likely enhance goodwill toward the United States among the Iranian public.

Given the progress of Iran's nuclear program, this issue deserves priority in second-track talks. The notion that the Islamic Republic will follow the Libyan model and completely dismantle its nuclear infrastructure is not tenable. The task of negotiators working on this issue would be to devise measures that Tehran could take to win back the trust of the international community, such as submitting to a rigorous inspection regime to show that its nuclear program is not being diverted for military purposes. Iran should be granted its NPT rights to develop a limited capability to enrich uranium; in turn, however, it should have to submit to verification procedures such as snap inspections, allow the permanent presence of personnel from the International Atomic Energy Agency, and make full disclosures about its previous activities. Iran's ultimate goal may be to produce nuclear weapons. But the case of Iraq demonstrates that an exacting verification process backed by the international community can obstruct such ambitions.

Negotiations on a third track should focus on Iraq. In light of the Baker-Hamilton report, many Washington policymakers and pundits have been busy offering reasons why Iran will not be helpful. But many of these arguments are fallacious. The first myth is the notion that Tehran would prefer to see U.S. troops remain and die in Iraq since mounting casualties will deter the United States from embarking on another misadventure. In fact, after nearly four years of an inconclusive war, Iranian officials believe that the United States' imperial ambitions have been sufficiently deflated -- that the giant requires no further bleeding. The second myth holds that gaining Iran's cooperation would require shelving UN sanctions against its nuclear program. But such reasoning presupposes that there is a robust UN process that needs to be retarded, which is inaccurate. And unlike their U.S. counterparts, Iranian leaders perceive little connection between their Iraq policy and their nuclear policy. The prevailing consensus within Tehran today is that the U.S. occupation in Iraq prevents measurable political progress there and that the only way Iraq can be stabilized is by gradually removing U.S. forces.

Whatever the perceptions and motivations of Tehran, its influence in Iraq makes it an indispensable partner. Although Iran has been busy enhancing the fortunes of its Iraqi Shiite allies and arming their militias, and Washington has responded with recriminations, the two governments have many objectives in common. Tehran, like Washington, is interested in defusing the ongoing civil war and maintaining Iraq's unity. The Iranian ruling elite also appreciates that the most suitable way to realize its aims is through elections, which are bound to further empower the majority Shiite community. A functioning Iraqi state would facilitate the departure of U.S. forces, neutralize the insurgency, and incorporate moderate Sunnis into the governing order -- all goals that serve the interests of both Iran and the United States.

Instead of bemoaning Iran's influence in Iraq, U.S. policymakers should focus on the challenge of managing that power constructively. Once Iran's legitimate influence is recognized and a framework for harmonizing the two countries' policies is established, it may be easier for Washington to make demands of Tehran. Washington would be in a better position to pressure Tehran, for example, to temper the Iraqi Shiites' secessionist tendencies and rein in recalcitrant actors such as the Shiite militia leader Muqtada al-Sadr. Moreover, Iran today is one of Iraq's largest trading partners. The United States should further facilitate such trade because it helps stabilize southern Iraq. The sooner Washington realizes that Tehran can play a useful role in Iraq, the sooner it may be able to prevent the fragmentation of Iraq and the further destabilization of the Persian Gulf.

The fourth -- and thorniest -- set of negotiations would have to focus on the Israeli-Palestinian peace process, which Tehran has steadfastly opposed, often by supporting terrorism. Tehran's antagonism toward Israel is based on its Islamist ideology, which denies the legitimacy of the Zionist enterprise. Iran's support for Hezbollah and Hamas gives Tehran a voice in an area beyond its military reach. With Hezbollah emerging triumphant and more popular than ever from its conflict with Israel last summer, Iran's resolution has stiffened further. Washington will need to change that posture. If Iran and the United States attempt to normalize their relationship, then, for the first time, Tehran's belligerence toward Israel could lead to its losing real benefits.

A careful look at Iran's history reveals that its behavior can change for the better. In the 1990s, for instance, the right incentives persuaded Tehran to stop assassinating Iranian dissidents in Europe and supporting certain terrorist activities in the Persian Gulf. In 1997, a German court convicted Iranian government agents of murdering Kurdish opposition leaders in a restaurant in Berlin five years earlier, leading European governments to withdraw their emissaries from Tehran and impose restrictions on trade. The Islamic Republic quickly abandoned the practice of targeting dissidents in exile. In a similar vein, Saudi Arabia and the Gulf states agreed to normalize relations with Iran in the 1990s only if it stopped supporting radical elements within these states. In this case, too, the strategic advantages of détente convinced Tehran to change its ways.

Washington should apply those lessons now. As the United States and Iran attempt to resolve their differences, a natural momentum is likely to push Tehran away from its opposition to the Middle East peace process and its reliance on terrorism. That shift should be helped along with diplomatic and economic inducements. The point would be not to persuade Tehran to abandon Hezbollah, for example, but to pressure Tehran so that it, in turn, can persuade Hezbollah to play a constructive role in Lebanese politics and stop attacking Israel.

For nearly three decades, high emotions and irresponsible rhetoric have obstructed the development of a rational relationship between the United States and Iran. Too often, pragmatism has been sacrificed at the altar of ideology, and common interests have been obscured by convoluted historical grievances. Today, however, there exists in Iran at least one powerful faction -- the pragmatists among the new right -- willing to consider accommodation with Washington. Should Washington reciprocate by devising a comprehensive strategy of détente, it might be possible for Iran and the United States to finally overcome their mutual hostility.

A new paradigm cannot preclude tension, or even conflict, but it could persuade Tehran that its interests would be best served if it voluntarily restrained its radical tendencies. Iran will remain a problem for the United States for the foreseeable future; the question is how best to manage its complexities and contradictions. An offer by the United States to normalize relations and start talks on all outstanding issues between the two states would give Iran a chance to choose whether it wants to be a nation defending legitimate imperatives or one guided by self-defeating delusions. And for the first time in decades, there is an indication that Iran may opt for the former.

Ray Takeyh is a Senior Fellow at the Council on Foreign Relations and the author of "Hidden Iran: Paradox and Power in the Islamic Republic".

Iran: Détente, Not Regime Change

Over five years after the Bush administration vowed to transform the Middle East, the region is indeed profoundly different. Washington's misadventures in Iraq, the humbling of Israeli power in Lebanon, the rise of the once-marginalized Shiites, and the ascendance of Islamist parties have pushed the Middle East to the brink of chaos.

In the midst of the mess stands the Islamic Republic of Iran. Its regime has not only survived the U.S. onslaught but also managed to enhance Iran's influence in the region. Iran now lies at the center of the Middle East's major problems -- from the civil wars unfolding in Iraq and Lebanon to the security challenge of the Persian Gulf -- and it is hard to imagine any of them being resolved without Tehran's cooperation. Meanwhile, Tehran's power is being steadily enhanced by its nuclear program, which progresses unhindered despite regular protests from the international community.

This last development has put Washington in a bind. Ever since the revolution that toppled the shah in 1979, the United States has pursued a series of incoherent policies toward Tehran. At various points, it has tried to topple the regime -- even, on occasion, threatening military action. At others, it has sought to hold talks on a limited set of issues. Throughout, it has worked to box in Iran and to limit its influence in the region. But none of these approaches has worked, especially not containment, which is still the strategy of choice in the Iran policy debate.

If it hopes to tame Iran, the United States must rethink its strategy from the ground up. The Islamic Republic is not going away anytime soon, and its growing regional influence cannot be limited. Washington must eschew superficially appealing military options, the prospect of conditional talks, and its policy of containing Iran in favor of a new policy of détente. In particular, it should offer pragmatists in Tehran a chance to resume diplomatic and economic relations. Thus armed with the prospect of a new relationship with the United States, the pragmatists would be in a position to sideline the radicals in Tehran and try to tip the balance of power in their own favor. The sooner Washington recognizes these truths and finally normalizes relations with its most enduring Middle Eastern foe, the better.

NO GOOD OPTIONS

When discussing Iran, President George W. Bush commonly insists that "all options are on the table" -- a not-so-subtle reminder that Washington might use force against Tehran if all else fails. This threat overlooks the fact that the United States has no realistic military option against Iran. To protect its nuclear facilities from possible U.S. strikes, Iran has dispersed them throughout the country and placed them deep underground. Any U.S. attack would thus have to overcome both intelligence-related challenges (how to find the sites) and thorny logistical ones (how to hit them). (As the Iraq debacle has shown, U.S. intelligence is not always as reliable as it should be.) And even a successful military attack would not end the mullahs' nuclear ambitions; it would only motivate them to rebuild the destroyed facilities, and to do so with even less regard for Iran's treaty obligations.

What about holding a conditional dialogue, like the one proposed by Secretary of State Condoleezza Rice? In May 2006, Rice seemed to take a major step forward when she announced that the United States would be willing to participate in multilateral talks with Iran over the nuclear question if Iran suspended its uranium-enrichment activities. But the statement miscast the dispute between the United States and Iran as a simple problem of disarmament. In fact, the political and strategic differences between the two countries run much deeper -- and require a far more comprehensive approach.

Given these unpalatable realities, many U.S. policymakers have begun to gravitate toward what they see as the least objectionable option: containment. Their hope is that the systematic application of diplomatic pressure and economic sanctions will counter Tehran's nefarious designs in the short term and eventually usher in a new Iranian government more democratic and more amenable to U.S. interests.

The idea of containing Iran is not new; in one form or another, it has been the de facto policy of the United States since the inception of the Islamic Republic, and it has enjoyed broad bipartisan support in Washington. Yet to endorse it in good conscience today, one must answer important questions: Can a state that projects its influence through indirect means, such as supporting terrorism, financing proxies, and associating with foreign Shiite parties, truly be contained? Will other states in the region be willing to help the United States isolate Iran?

Were Washington to rationally consider its alternatives, it would quickly realize that the answer to these questions is no. But U.S. policy has long been dominated by a visceral suspicion of Tehran. During the heady days that followed the 1979 revolution, Iran's Islamist rage appeared awesome and dangerously expansive. The ruling clerical elite viewed Iran's borders as relics of a discredited past and seemed committed to exporting the revolution. The regional order, however, proved more durable than the mullahs had expected, and most of Iran's revolutionary dreams perished on the battlefields of Iraq in the 1980s. The costly war with Baghdad forced the clerical elite to realize the limits of its power and the impracticality of its ambitions. Tehran persisted with its universalist rhetoric, but its foreign policy became quite pragmatic. Still, a perception of Iran as a destabilizing force congealed in the U.S. imagination and has endured ever since, even though Iran stopped being a revisionist state long ago and has now become a medium-sized power seeking regional preeminence. Containment, in other words, ceased to be appropriate a while back because Iran stopped being a revolutionary state bent on forcibly exporting its model of government.

In fact, containment never worked -- and it has even less of a chance of working in the future. Its failures have been well documented in yearly reports by the State Department, which detail Iran's ongoing support for terrorism and warn of advances in its nuclear program. Sanctions and other forms of U.S. pressure have failed to prevent Iranian misbehavior. Worse, the Bush administration has taken steps recently that make containment an even less effective policy. Washington's ill-advised invasion of Iraq has benefited Iran by empowering local Shiite parties sympathetic to Tehran. Long gone are the days when a powerful, Sunni-dominated Iraq could function as a counterweight to Shiite power in Iran. Iraq's Shiites are hardly homogeneous, but the leading Shiite parties in power in Baghdad -- Dawa and the Supreme Council for the Islamic Revolution in Iraq -- have intimate ties to Tehran. This does not mean that Iraq's new leaders are willing to subordinate their interests to those of Iran, but they are unlikely to confront the Islamic Republic at the behest of Washington.

Nor is any other country in the Middle East likely to stand up to Iran today. A long tradition of purchasing security from the British Empire and then from the United States historically offered the Arab sheikdoms of the Persian Gulf a degree of independence vis-á-vis their powerful Persian neighbor. But the Bush administration's impetuous behavior and its inability to pacify Iraq have shattered local confidence in U.S. capabilities. Widespread anti-Americanism has made it harder for governments in the region to cooperate with Washington or to allow U.S. forces on their soil. The United States may be able to keep offshore naval forces and modest bases in reliable states such as Kuwait, but it is unlikely to have a significant presence in the region, as it is too unpopular with the masses and seems too erratic to the elites. Many Persian Gulf states now have more confidence in Iran's motivations than in the United States' destabilizing designs. And so as Iran's power increases, the local sheikdoms are likely to opt for accommodating Tehran rather than confronting it.

The international community has also seemed relatively indifferent to Iran's actions. Over the past year, the Bush administration has scored a number of procedural points against Tehran: for example, at Washington's insistence, the UN Security Council has censured Iran and urged suspension of its nuclear program. Despite such symbolic successes, however, few great powers now support the imposition of strenuous sanctions on the Islamic Republic. This is not because the French are pusillanimous or the Russians are unprincipled but because Washington's allies do not agree that Iran poses a major and urgent threat. For them, Iran's nuclear ambitions and even its penchant for terrorism are disturbing but manageable challenges that can be addressed without resorting to military force or coercive economic measures. During the early days of the Cold War, the United States was able to garner support for containing the Soviet Union because most of its European partners were as concerned about the Soviets as it was. Not so with Iran today; with the exception of Israel, few of the United States' friends seem very worried.

AN AFFAIR TO REMEMBER

In order to develop a smarter Iran policy, U.S. leaders must first accept certain distasteful facts -- such as Iran's ascendance as a regional power and the endurance of its regime -- and then ask how these can be accommodated. Despite its incendiary rhetoric and flamboyant claims, the Islamic Republic is not Nazi Germany. It is an opportunistic power seeking to assert predominance in its immediate neighborhood without recourse to war. Acknowledging that Iran is a rising power, the United States should open talks with a view to creating a framework to regulate Iran's influence, displaying a willingness to coexist with Iran while limiting its excesses. In other words, Washington should embrace a policy of détente.

As far-fetched as this call may seem, the United States does have experience dealing with seemingly intractable powers. In the late 1960s, as the U.S. presence in Asia was waning, China began to flex its muscles in its neighborhood. President Richard Nixon and Henry Kissinger, his national security adviser, did not respond by denying the reality of Chinese power. They started talking to Beijing, soon winning China's assistance in ending the Vietnam War and in stabilizing East Asia. Similarly, the Nixon administration's détente policy toward the Soviet Union succeeded not only in averting conflict with Moscow but also in gaining its cooperation on critical arms control issues.

It is not entirely clear whether Iran would be as willing a negotiating partner today as China and the Soviet Union once were. But there is reason to hope so. Recent developments in the Middle East and Iran's own internal convulsions have placed Tehran at a critical juncture: Iran's emergence as the most powerful state in the Persian Gulf means that Tehran might finally alter its relationship with its great nemesis; it must move toward either coexistence or confrontation with the United States.

Throughout previous attempts at negotiations with Washington, the Iranian government had favored comprehensive talks over discussions of a single issue. In its latest response to the joint offer by the United States and the European Union last summer, Tehran stressed its readiness for "long-term cooperation in security, economic and political and energy areas in order to achieve sustainable security in the region and long-term energy security." It also argued that "to resolve the issue at hand in a sustainable manner, there would be no alternative except to recognize and remove the underlying roots and causes that have led the two sides to the current complicated position."

Getting past this "complicated position" may require Washington to pay closer attention to recent changes in Tehran. Iran's need for a foreign policy better adapted to changes in the Middle East, the regime's perennial factionalism, and, perhaps most significant, the rise of a new generation of leaders in Tehran have sparked important internal debates within the regime. If the United States plays its cards right, it could become an important arbiter in those deliberations.

Westerners tend to see Iran's domestic politics as a contest between hard-liners and pragmatists. Jockeying by the former president, Hashemi Rafsanjani, and the supreme leader, Ali Khamenei, along with the periodic ebbs and flows of the reform movement, have long preoccupied foreigners hoping to nudge Iranian politics toward democratization. But these observers have failed to realize that the old model of liberals versus conservatives no longer holds. The Iranian regime is in the process of transforming itself, under the influence of a rising group of young conservatives. The elders of the revolution still retain ultimate authority, but they are increasingly reacting to initiatives launched by their more assertive disciples. There no longer is a main fault line running between the left and the right; today, fissures in Tehran run between the old and the young -- and among the young of the new right.

Unlike their predecessors during 1980s, these new leaders -- even the provocative Iranian president, Mahmoud Ahmadinejad -- have refrained from denouncing and plotting the overthrow of the monarchies of the Persian Gulf and the pro-Western regimes in Egypt and Jordan; they are more concerned with these states' external relations than with their internal composition. They have also refrained from exporting the Iranian Revolution to the fertile grounds of Iraq. Anticipating opposition to such attempts from senior Iraqi Shiite clerics and politicians, Iranian officials have preferred to focus on more practical concerns. Although they want a sympathetic and accommodating neighbor, they have no illusions that Iraqi Shiites would yield to Tehran's mandates. They continue to support Shiite parties in Iraq not because they wish to install an Iranian puppet or proxy there but because they hope to prevent the rise of another hostile Sunni-dominated regime.

This is not to suggest that the new right is not seeking meaningful changes in Iran's international relations. But the debates gripping Tehran today focus on how the regime can consolidate its sphere of influence and best exploit its status as an emerging regional hegemon. The displacement of the Taliban in Afghanistan and of Saddam Hussein, as well as the United States' entanglement in Iraq, have led callow reactionaries in Iran to perceive unique opportunities for their country's ascendance. Iran now sees itself as the indispensable nation in the Middle East.

DIVIDED WE STAND

As is customary for any leading faction in Iranian politics, however, the new right is itself fractured. And one of the matters that divide it is whether Iran's interests are best served by coexisting with the United States or by defying it. On one end of the spectrum are the radicals, whose most prominent exponent is President Ahmadinejad but who also include individuals in other critical posts, such as Morteza Rezai, the deputy commander of the Revolutionary Guards, and Mojtaba Hashemi Samareh, the deputy minister of the interior. Drawing their strength from the Revolutionary Guards (particularly its intelligence apparatus), the Basij paramilitary force, and groups such as the Alliance of the Developers of Islamic Iran and the Islamic Association of Engineers, the radicals cannot be easily ignored. Although many senior members of the clergy dismiss Ahmadinejad's religious pretensions, he has won the support of a narrow segment of the clerical class, especially the archreactionary Ayatollah Muhammad Taqi Mesbah-Yazdi, a spiritual guide to many young reactionaries.

The formative political experience of many of these radicals was not the 1979 revolution but the war against Iraq in the 1980s, which left them disdainful of the United States and the international community and obsessed with self-reliance. According to these veterans, the war showed that Iran's interests cannot be safeguarded by adhering to international treaties or appealing to Western opinion. In particular, Ahmadinejad and his allies see the United States as "the Great Satan," a source of cultural contamination and a rapacious capitalist power that exploits indigenous resources. In their view, the United States has caused all of Iran's misfortunes, from the shah's regime to the country's invasion by Iraq under Saddam. But they also see the United States as a declining power. General Hussein Salami, a commander of the Revolutionary Guards, said in March 2006, "We have assessed the ultimate power of global arrogance, and on this basis there is nothing to worry about."

Despite his deep religious convictions, Ahmadinejad is not a messianist seeking to usher in a new world order; he is a canny manipulator trying to rouse public indignation in a chaotic neighborhood. He understands that the carnage in Iraq, the stalled Israeli-Palestinian peace process, and the inability of Arab rulers to stand up to Washington have created intense anti-Americanism throughout the Middle East and that there is growing popular hunger for a leader willing to stand up to Israel and the United States. And he very much wants to be that leader. To that end, he has used incendiary rhetoric about the Holocaust and Israel, support for Hezbollah, and appeals to Muslim solidarity to overcome sectarian divides, turning his Shiite Persian country into an object of admiration even for Sunni Arabs.

Understandably, too, Ahmadinejad and his allies view the acquisition of nuclear weapons as critical to consolidating Iran's position and helping the country eclipse U.S. influence in the region -- a prize worth suffering pain and sanctions to achieve. Ayatollah Mesbah-Yazdi has declared that task a "great divine test," and the newspaper Kayhan, a mouthpiece of the extreme right, has argued that the "knowledge and ability to make nuclear weapons" are "necessary in preparation for the next phase" on "the future battlefield." Given their distrust of Washington, the hard-liners assume that the United States' objections to their nuclear ambitions have less to do with countering proliferation than with exploiting the issue to enlist the support of U.S. allies against Iran. As Ahmadinejad has put it, "If this problem is resolved, then [the Americans] will bring up the issue of human rights. If the human rights issue is resolved, then they will probably bring up the issue of animal rights."

Ahmadinejad's antics have succeeded in turning him into an object of international attention over the last two years, making it easy for outside observers to overlook the emergence of another important camp within Iran's new right. This group, while also conservative, tends to stress Iranian nationalism over Islamic identity and pragmatism over ideology. Among the leaders of the group are Ali Larijani, the head of the Supreme National Security Council; Abbas Mohtaj, the commander of Iran's navy; and Ezzatollah Zarghami, the head of the Islamic Republic of Iran Broadcasting -- all nationalists who, like the radicals, were shaped by the Iran-Iraq War but who drew different conclusions from it. During the 1990s, as reformers took over many of Iran's state institutions, these conservatives retreated into research centers, particularly Imam Hussein University, to reassess Iran's international relations. Judging by their writings and speeches, they seem to have concluded both that the end of the Cold War and Iran's unique geographic location made it a natural regional power and that Iran's progress had been thwarted by the regime's ideological excesses and its unnecessarily hostile approach to the West. The only way for Iran to realize its potential, they argued, was for it to behave more judiciously, and that meant limiting some expressions of its influence, acceding to certain international norms, and negotiating mutually acceptable compacts with its adversaries. In the last two years, many members of this pragmatic faction have risen to influence within the Supreme National Security Council, the intelligence community, and the military. Using their links to traditional clerical networks and their intimate ties to the supreme leader, they are trying to wrest control of Iran's international relations from the militants. The real significance of Iran's municipal elections in December 2006, in which Ahmadinejad's camp scored disappointing results, lay not so much in the revival of the reform movement as in the fact that many younger conservatives who are uneasy about Ahmadinejad's policies did well.

Nothing divides the two groups of the new right more than their attitude toward the United States. The pragmatists argue that Iran's predominance cannot be guaranteed without a more rational relationship with Washington. In an interview in late 2005, Larijani said, "We may be sure that the Americans are our enemies," but "working with the enemy is part of the work of politics." He added, "The strategy of curbing and reducing disruptions and normalizing relations is itself beneficial in the long term." Like the hawks, Larijani and his allies argue that the U.S. presence in the Middle East is bound to diminish, but, unlike the hawks, they worry that it could continue to block Tehran's resurgence. In their view, smoothing relations with the United States would pave the way for Iran to increase its influence in the region.

The moderates agree with the radicals that to enhance its influence Iran needs a nuclear weapons capability. As the deputy head of the Supreme National Security Council, Ali Hosseinitash, has noted, "The nuclear program is an opportunity for us to make endeavors to acquire a strategic position and consolidate our national identity." But the moderates also believe in restraint. They advocate continued adherence to Iran's obligations under the Nuclear Nonproliferation Treaty (NPT) and stress the importance of offering confidence-building measures to the international community. They hope that by improving Tehran's relationship with Washington they can assuage U.S. concerns about Iran's nuclear development without having to abandon the program.

Hovering over this debate is the indecisive supreme leader, who so far has tentatively supported the pragmatists' drive for negotiations with the United States. On the one hand, Khamenei, a stern ideologue suspicious of the United States, seems to endorse Ahmadinejad's fiery denunciations of the West and his assertive Islamism. Khamenei has deficient religious credentials -- his lack of erudition places him at a disadvantage in the hierarchical clerical estate -- and that weakness has forced him to rely on reactionary elements to bolster his power; it would be difficult for him to rein in the determined Ahmadinejad. On the other hand, Khamenei's relationship with the hard-liners has always been uneasy, as they have doubted his resolution during times of crisis. In order to survive the treacherous politics of the Islamic Republic, Khamenei has balanced different factions without unduly empowering any one of them.

So far, the pragmatists have managed to nudge Khamenei toward accepting potential negotiations with the United States over issues of mutual concern. But Iran's political landscape is changing rapidly. The United States' declining fortunes in Iraq, Hezbollah's touted victory against Israel last summer, and the success of Ahmadinejad's defiant nuclear diplomacy seem to prove right those who call for confrontation. The supreme leader, who is generally prone to indecision, now seems disinclined to settle the internal debates in Tehran in a conclusive manner.

THE UNITED WAY

The most effective way for Washington to resolve this uncertainty in its favor would be to practice more imaginative diplomacy. That would require more than a policy shift; it would require a paradigm shift. Guided by the notion of containment, U.S. policymakers have long seen the normalization of relations as the end result of a long process of negotiations. But with a new policy of engagement, normalization would have to be the starting point of talks; it would then facilitate discussions on issues such as nuclear weapons and terrorism. A strategy that seeks to create a web of mutually reinforcing security and economic arrangements has the best chance of tying Iran to the status quo in the region. In essence, a new situation would be created in which Tehran's relationship with Washington would be more valuable to the regime than either its ties to Hezbollah or its pursuit of nuclear arms.

To provoke such a change, Washington must strengthen the hands of the pragmatists in Tehran by offering Iran relief from sanctions and diplomatic relations. Washington's recognition of Iran's regional status and deepened economic ties with the West might finally enable the pragmatists to push Khamenei to marginalize the radicals who insist that only confrontation with the United States can allow Iran to achieve its national objectives.

As the United States reconsiders its Iran policy, it should dispense with the notion of offering Tehran security guarantees. It is conventional, even routine, in Washington policy circles to suggest that the Iran conundrum can be resolved only if the Bush administration pledges not to attack Iran. This argument reflects a fundamental misunderstanding of how the Islamic Republic perceives its power and its place in the Middle East today. The guardians of the theocratic regime do not fear the United States; they do not relate to the international community from a position of strategic vulnerability. Tehran now seeks not assurances against U.S. military strikes but an acknowledgment of its status and influence.

The United States does need to make important changes to its approach to Iran, however, in terms of both substance and style. Given the theocratic nature of the Iranian regime and its paranoia, Washington will have to adapt its rhetoric. U.S. officials can no longer denounce Iran as an "outpost of tyranny" or the "central banker of terrorism" in one breath and propose negotiations in the next. Like all regimes born of revolution, Tehran insists that the international community not just recognize its interests but also legitimize its power. Iran's theocrats are in no way unique; remember that for decades the Soviets demanded that the United States officially acknowledge postwar demarcations of Eastern Europe. A new U.S. policy toward Iran will have to officially recognize the authority of the Islamic Republic.

In this spirit, Washington must abandon its hopeless policy of regime change, including its paltry award of $75 million to Iranian exiles and for broadcasts into Iran. For one thing, such idealism is misplaced. Unlike Eastern Europe in the 1980s, Iran simply does not have a cohesive opposition movement willing to take direction and funding from the United States. For another, calls for regime change are counterproductive. Washington's fulminations and its provision of aid to the (nonexistent) democratic opposition have convinced many Iranian hard-liners that Washington's offer to negotiate is an attempt to undermine the regime in Tehran. Thus, any effort by moderates to engage with the United States is routinely denounced as a concession to the Great Satan's subversive ploys. Iran will certainly change, but on its own terms and at its own pace. The United States has an interest in promoting a more tolerant government in Tehran, but it will not help itself by broadcasting tall tales from Iranian exiles or with Bush's appeals to an indifferent Iranian populace. Integrating Iran into the world economy and global society would do far more to accelerate its democratic transformation.

RULES OF ENGAGEMENT

The best way toward an effective, engaged relationship with Iran is for Washington to open direct negotiations on issues of critical importance, along four separate tracks. Since the purpose of the talks would be to normalize relations, the first track should deal with setting a timetable for resuming a diplomatic relationship, gradually phasing out U.S. sanctions, and returning Iran's frozen assets. Holding out meaningful incentives such as these would go a long way toward facilitating productive discussions on more difficult issues and would likely enhance goodwill toward the United States among the Iranian public.

Given the progress of Iran's nuclear program, this issue deserves priority in second-track talks. The notion that the Islamic Republic will follow the Libyan model and completely dismantle its nuclear infrastructure is not tenable. The task of negotiators working on this issue would be to devise measures that Tehran could take to win back the trust of the international community, such as submitting to a rigorous inspection regime to show that its nuclear program is not being diverted for military purposes. Iran should be granted its NPT rights to develop a limited capability to enrich uranium; in turn, however, it should have to submit to verification procedures such as snap inspections, allow the permanent presence of personnel from the International Atomic Energy Agency, and make full disclosures about its previous activities. Iran's ultimate goal may be to produce nuclear weapons. But the case of Iraq demonstrates that an exacting verification process backed by the international community can obstruct such ambitions.

Negotiations on a third track should focus on Iraq. In light of the Baker-Hamilton report, many Washington policymakers and pundits have been busy offering reasons why Iran will not be helpful. But many of these arguments are fallacious. The first myth is the notion that Tehran would prefer to see U.S. troops remain and die in Iraq since mounting casualties will deter the United States from embarking on another misadventure. In fact, after nearly four years of an inconclusive war, Iranian officials believe that the United States' imperial ambitions have been sufficiently deflated -- that the giant requires no further bleeding. The second myth holds that gaining Iran's cooperation would require shelving UN sanctions against its nuclear program. But such reasoning presupposes that there is a robust UN process that needs to be retarded, which is inaccurate. And unlike their U.S. counterparts, Iranian leaders perceive little connection between their Iraq policy and their nuclear policy. The prevailing consensus within Tehran today is that the U.S. occupation in Iraq prevents measurable political progress there and that the only way Iraq can be stabilized is by gradually removing U.S. forces.

Whatever the perceptions and motivations of Tehran, its influence in Iraq makes it an indispensable partner. Although Iran has been busy enhancing the fortunes of its Iraqi Shiite allies and arming their militias, and Washington has responded with recriminations, the two governments have many objectives in common. Tehran, like Washington, is interested in defusing the ongoing civil war and maintaining Iraq's unity. The Iranian ruling elite also appreciates that the most suitable way to realize its aims is through elections, which are bound to further empower the majority Shiite community. A functioning Iraqi state would facilitate the departure of U.S. forces, neutralize the insurgency, and incorporate moderate Sunnis into the governing order -- all goals that serve the interests of both Iran and the United States.

Instead of bemoaning Iran's influence in Iraq, U.S. policymakers should focus on the challenge of managing that power constructively. Once Iran's legitimate influence is recognized and a framework for harmonizing the two countries' policies is established, it may be easier for Washington to make demands of Tehran. Washington would be in a better position to pressure Tehran, for example, to temper the Iraqi Shiites' secessionist tendencies and rein in recalcitrant actors such as the Shiite militia leader Muqtada al-Sadr. Moreover, Iran today is one of Iraq's largest trading partners. The United States should further facilitate such trade because it helps stabilize southern Iraq. The sooner Washington realizes that Tehran can play a useful role in Iraq, the sooner it may be able to prevent the fragmentation of Iraq and the further destabilization of the Persian Gulf.

The fourth -- and thorniest -- set of negotiations would have to focus on the Israeli-Palestinian peace process, which Tehran has steadfastly opposed, often by supporting terrorism. Tehran's antagonism toward Israel is based on its Islamist ideology, which denies the legitimacy of the Zionist enterprise. Iran's support for Hezbollah and Hamas gives Tehran a voice in an area beyond its military reach. With Hezbollah emerging triumphant and more popular than ever from its conflict with Israel last summer, Iran's resolution has stiffened further. Washington will need to change that posture. If Iran and the United States attempt to normalize their relationship, then, for the first time, Tehran's belligerence toward Israel could lead to its losing real benefits.

A careful look at Iran's history reveals that its behavior can change for the better. In the 1990s, for instance, the right incentives persuaded Tehran to stop assassinating Iranian dissidents in Europe and supporting certain terrorist activities in the Persian Gulf. In 1997, a German court convicted Iranian government agents of murdering Kurdish opposition leaders in a restaurant in Berlin five years earlier, leading European governments to withdraw their emissaries from Tehran and impose restrictions on trade. The Islamic Republic quickly abandoned the practice of targeting dissidents in exile. In a similar vein, Saudi Arabia and the Gulf states agreed to normalize relations with Iran in the 1990s only if it stopped supporting radical elements within these states. In this case, too, the strategic advantages of détente convinced Tehran to change its ways.

Washington should apply those lessons now. As the United States and Iran attempt to resolve their differences, a natural momentum is likely to push Tehran away from its opposition to the Middle East peace process and its reliance on terrorism. That shift should be helped along with diplomatic and economic inducements. The point would be not to persuade Tehran to abandon Hezbollah, for example, but to pressure Tehran so that it, in turn, can persuade Hezbollah to play a constructive role in Lebanese politics and stop attacking Israel.

For nearly three decades, high emotions and irresponsible rhetoric have obstructed the development of a rational relationship between the United States and Iran. Too often, pragmatism has been sacrificed at the altar of ideology, and common interests have been obscured by convoluted historical grievances. Today, however, there exists in Iran at least one powerful faction -- the pragmatists among the new right -- willing to consider accommodation with Washington. Should Washington reciprocate by devising a comprehensive strategy of détente, it might be possible for Iran and the United States to finally overcome their mutual hostility.

A new paradigm cannot preclude tension, or even conflict, but it could persuade Tehran that its interests would be best served if it voluntarily restrained its radical tendencies. Iran will remain a problem for the United States for the foreseeable future; the question is how best to manage its complexities and contradictions. An offer by the United States to normalize relations and start talks on all outstanding issues between the two states would give Iran a chance to choose whether it wants to be a nation defending legitimate imperatives or one guided by self-defeating delusions. And for the first time in decades, there is an indication that Iran may opt for the former.

Ray Takeyh is a Senior Fellow at the Council on Foreign Relations and the author of "Hidden Iran: Paradox and Power in the Islamic Republic".

Iraqi police and a community leader said a bomb blast near a soccer field in the city of Ramadi on Tuesday killed 18 people, mostly children, but the U.S. military said it was unaware of such an attack.

Amid conflicting reports over what happened in the volatile western city, the U.S. military said its soldiers had carried out a controlled explosion in Ramadi, also near a soccer field, that slightly wounded 30 people, including nine children.

"I can't imagine there would be another attack involving children without our people knowing," Major Jeff Pool, a spokesman for U.S. forces in western Anbar province, told Reuters. The wounded had cuts and bruises, he said.

The U.S. military often carries out controlled blasts in Iraq to destroy captured weapons or unexploded bombs.

Pool said the controlled blast in Ramadi was "stronger than we had expected." He said it was carried out in the courtyard of a building where bags of explosives had been found. Windows from a nearby building were blown out, causing the wounds.

U.S. forces went to the site and helped evacuate the wounded, said Pool.

Two Iraqi police sources said 18 people had been killed in the blast they described. One, a colonel in Ramadi who declined to be identified, said a suicide bomber detonated a truck bomb.

He put the time of the explosion at about 5 p.m. The controlled U.S. blast was at 5:34 p.m., Pool said.

Tribal leader Hamid Farhan al-Hays from Ramadi told Iraqiya state television 12 children and six women were killed.

Hays blamed the blast on Sunni al Qaeda, which is involved in an escalating power struggle with Sunni elders for control of Anbar, a vast desert province that is the heart of the Sunni Arab insurgency in Iraq. Ramadi is the capital of Anbar.

"The groups which did this barbaric crime are al Qaeda," he said.

A truck bomb near a Sunni mosque in Ramadi killed 52 people on Saturday, a day after the mosque's imam had made a speech criticizing al Qaeda, which is entrenched in the area.

On Monday, a suicide bomber blew up an ambulance at an Iraqi police station near Ramadi, killing 14 people including women and children.

INCREASING CONFLICT

The attacks signaled an increasing conflict in Anbar between al Qaeda and Sunni tribal leaders, officials have said.

Such attacks also underscore the violence gripping Iraq, as U.S. and Iraqi forces step up a new security crackdown in Baghdad. Washington is also sending extra troops to Anbar.

As part of efforts to stabilize Iraq, officials from regional states including Iran and Syria would join U.S. and British envoys at a meeting in Baghdad next month, Iraqi Foreign Minister Hoshiyar Zebari said on Tuesday.

U.S. Secretary of State Condoleezza Rice said Iraq planned to convene a high-level meeting of its neighbors and the Group of Eight leading industrialized countries as early as in April.

That meeting, to be held at ministerial level, would follow lower-level discussions in Baghdad in March, Rice said in excerpts of congressional testimony that were released by the State Department.

The U.S. embassy in Baghdad said Ambassador Zalmay Khalilzad would attend the planned mid-March talks. A British embassy spokeswoman said Britain would also take part but it was unclear at what level.

The March meeting would be a chance for Western and regional powers to try to bridge some of their differences over Iraq, Zebari said by telephone from Denmark where he is on a visit.

"Our hope is that this will be an ice-breaking attempt for maybe holding other meetings in the future. We want Iraq, instead of being a divisive issue, to be a unifying issue," said Zebari.

In December, a report by the bipartisan U.S. Iraq Study Group recommended Washington hold direct talks with Damascus and Tehran to persuade them to help stem violence in Iraq. President Bush reacted coolly.

Washington accuses Iran of fanning violence in Iraq and has recently presented what the U.S. military says is evidence Iranian-manufactured weapons are being smuggled into Iraq.

U.S. officials accuse Syria of allowing foreign fighters to cross its long, porous border with Iraq to join those fighting the U.S.-backed government.